Finance

4 Important Factors to Consider Before Accessing a Business Loan

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What are the important things to consider as a business owner before applying for a business loan?

Most business owners at one point in time may need a loan or overdraft in order to expand. It’s normally advisable for entrepreneurs to access these facilities after operating for over 12 months and most financial institutions usually grant loans to businesses that are over 12 or 18 months old.

It’s prudent for individuals trying to start a new business to use their personal savings or borrow money from friends and family which is likely to have a flexible payment plan and most often without interest.

Before accessing a business loan it’s advisable to consider the following factors:

1. Purpose of Accessing a Business Loan

Loan purpose is very important when accessing a facility, it’s basically the profitability of the intended purpose. Every business owner has to consider the profitability of projects or products if it’s commerce.

It’s important to invest in a product or a project one is already dealing with. For instance, a grocery or cosmetic business owner has to invest in more varieties of products other than diverting into unrelated businesses such as pure water production, mini importation, vanity number registration, which may seem lucrative.

Like we have always advised in this blog, you shouldn’t start a business you don’t understand just because you heard that people are making money from it. It was an introverted billionaire, Warren Buffet who said that the first rule of investing is “Never Lose Money.”

Diversion of funds usually affects business capital considering the fact that it takes time for new ventures to be profitable. Even if you have a proven template for building a billion-dollar company, as long as you are new to the business, don’t dare divert funds – it might come back to hurt you.

Related: 4 Reasons Why Your Business Needs Credit

2. What is Your Repayment Capacity?

How easy is it for you to pay back the business loan? Before accessing a loan, a business owner must consider his/her repayment capacity (that is after all expenses have been deducted) for the amount to be accessed. You don’t just jump into a loan offer just because you heard that a financial institution is offering loans.

Usually looking at the quest to expand entrepreneurs normally request high amounts even though they do not have the repayment capacity.

It’s important for a business to access an amount they can easily pay even when turnover is low and maybe double or increase the amount when accessing subsequent loans.

It’s important to note that doubling or increasing loan amounts is not compulsory since it can turn a good loan client into a bad one. Being able to pay back loans at the right time can go a long way to improve your credit score.

3. What is Your Income?

 

What your income capacity should be before applying for a business loan

Every business owner must consider his/her income before accessing a loan facility. One question to ask is how frequent your income is. For instance, if you receive your income on a contract or quarterly basis it’s important to agree on a flexible payment plan since most payments are done monthly.

This however is only for businesses such as schools, in order not to default in the months with low income.

It’s inadvisable to apply for a business loan that your monthly income can’t even take care of the payment plan. You can do business loan comparison on multiple lenders’ websites to be sure their payment plan is flexible enough for you. You can even apply for a business loan online.

Related: 5 Tips & Tricks to Choose the Best Personal Loan for Your Needs

4. What Will Be the Loan Duration?

One thing to consider when accessing a facility is the duration. It’s important to note that the longer the duration the higher the interest which would end up affecting working capital.

For instance, 6 months duration is okay for working capital. However, if it’s an investment loan like a store rental, it should have a longer duration. The loan duration must be comfortable enough for you before accessing your loan.

Conclusion

When these basic steps and the right decisions are made, a loan would help a business expand. It’s important to take a break after loan payments to access its impact or growth the loan has brought to the business since sometimes after payment business remains the same.

It’s necessary to avoid multiple borrowing since it leads to default.

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Linda Tagoe
Linda Tagoe is a risk analyst with one of the most reputable financial institutions in Ghana. She's also a contributor to Entrepreneur Business Blog - a leading business blog in Africa. You can connect with her via email, layikale@gmail.com

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